>GAMMON INDIA (IIFL)

Robust core; new forays could trigger large upsides

Improved outlook for infra capex, steadier execution and margin expansion due to input cost savings should drive strong PAT growth in the core construction business. An order coverage ratio of 3.45x provides sufficient revenue visibility. The listed infra subsidiary has the requisite experience to benefit from the likely upsurge in infra award activity, especially in the highways sector. While turning around the Italian acquisitions remains a challenge, they offer significant growth opportunity through the foray into the power equipment business in India. At current prices, the stock is trading at 35% discount to peers. Steadier execution and signs of traction in the power business are likely to drive a re-rating in the stock. BUY.

Better execution and margin improvement to drive growth in core construction business: In FY09, the core construction business was beset by a number of external problems: i) suspension of projects under execution; ii) disruption of construction sites due to heavy floods in Bihar and; iii) margin pressure due to low profitability in fixed-price captive projects. Execution rates should improve in absence of external impediments. A strong order book at Rs130bn (3.45x trailing 12 months’ revenues) and L1 pipeline of Rs20bn provide sufficient growth visibility. Profitability in the captive projects would also improve, thanks to sharp declines in input prices from FY09 levels driving a 22% PAT CAGR over FY09-12.

GIPL well-placed to benefit from up-tick in infra BOT projects: Gammon’s infra subsidiary, GIPL, currently has four operational projects—three road and one port terminal project. Along with the ten other projects across road, ports and power sectors, GIPL’s portfolio is well-diversified across sectors. With 100km of highways under operation and another 132km under development, along with two large BOT bridge projects, GIPL has the requisite capability to execute large, complex road projects. This should enable it to capitalise on the likely upsurge in NHAI award activity in the next 2-3 quarters.

Acquisitions provide opportunity to exploit the power opportunity; not factored in our valuations: Through the three Italian acquisitions in FY09, Gammon has got access to technology to foray in high-growth power equipment business in India. The company is also expanding the pressure parts manufacturing facility in India to improve cost competitiveness for both domestic and international projects. While turnaround of these companies remains a key challenge, we believe that the company is taking steps in the right direction. Our valuations do not factor any upsides from turnaround of overseas operations or project wins in India. However, successful foray in power business has potential to add upsides to our SOTP.

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